I would like to tribute this article to the commemoration of Indonesia's 65th Independence Day. We've seen so many people who try to establish an Islamic state (including in Indonesia) and claim that this state shall be eternally blessed by God and will solve all humankind problems. Not only that this is a false hope, it is also a big blunder. The main question is: does Islam actually recognize a specific legal form of Islamic state? My quick answer would be no. 

Islamic Political Leadership Succession: Lessons from the 4 Great Caliphs

Before we discuss the evolution of Islamic state throughout the history, let us first see how political leadership was formed and passed during the early era of Islam. When the Prophet Muhammad SAW was still alive, he had two authority within his hands, i.e. religion and politic. However, neither the Koran nor the Prophet ever stipulate any specific form of state to begin with. In any case, it was an informal form of leadership.

When the Prophet died, a huge debate occurred between his devoted followers ("Sahabat") on who will replace the Prophet's position as the leader of the people of Makkah and Madinah. If there is actually a clear concept of leadership and state in Islam, surely such debate would never happen, but as further recorded in various history books, the debate was so fierce that the Prophet's burial process was delayed for around 3 days. Without a doubt, this was the first political crisis in the moslem history. Many issues were discussed in that debate as people were trying to find the most suitable candidate, including ethnicity, seniority, and also capability of the candidates. You may wish to consider the fact that at that time, tribal issues were quite dominant, and there was a huge risk that our young Islamic community would be shattered due to this leadership succession. Miraculously, the community survived its first political trial.

When the debate was finally over, the Sahabats who attended the meeting agreed that the first person who converted into Islam, Abu Bakar, should become their first leader, the first caliph of the Islamic society. They also agreed that only political leadership which shall be passed to Abu Bakar, while religious leadership was deemed over with the death of the Prophet. After all, no one would be able to receive directly the wisdom of God other than the Prophet. Abu Bakar led the Islamic community for about 2.5 years. After he died, Umar bin Khatab became the next caliph through a direct appointment from Abu Bakar. Some prominent moslem historians claim that Abu Bakar has discussed Umar's appointment with other respectable Sahabats, and all of them agreed with his appointment. Nevertheless, it was Abu Bakar who directly appointed Umar as his successor. So by now, we could see 2 types of leadership succession. Later on, Ustman bin Affan became the successor of Umar. How did it go?

Umar appointed 6 members from the Sahabats (the "Council") with the task to elect the next caliph from the Council's own members. Again, another form of leadership succession. In my opinion, Umar was a great leader and he clearly understood that without any clear guidance, Abu Bakar's decision to directly appoint him would be considered as a binding precedent by the Islamic community if he also did the same in appointing his successor. Since he actually opposed the direct appointment mechanism, he decided to create a new mechanism for leadership succession. Then came Ali bin Abu Thalib as the 4th caliph.

After the death of Ustman due to a coup, Ali was elected as the new caliph through a direct election by the whole people of Madinah, and therefore became the first and also the last caliph who was appointed through a public election. The elections of Ali is a strong evidence that the early Islamic community practiced democracy, though maybe not as complex as today. Despite the inconsistencies in leadership succession mechanism, there is a general rule that we can learn from the above story. All of the 4 caliphs were considered as capable and respected leaders, and none of them were appointed because of family relationship with the previous ones. For such a young community with deep tribal issues, this was a great achievement indeed.

Unfortunately, this great system ended when Muawiyah bin Abu Sufyan gained the title of caliph. I'll reserve the story on how he got that title for another post (maybe when we discuss the Shia political movement), though I can say it here that it is a controversial one, and many historians are still disputing whether Muawiyah had valid grounds to obtain that title from Ali bin Abu Thalib. How did Muawiyah end the caliphate system of leadership succession? He appointed his own son, Yazid, as his successor, and by such act, he turned the caliphate into an ordinary kingdom. Yes, the Islamic people are still calling their leaders as caliphs, but they are not different from kings who gained their title simply because of family relationship.

The Evolution of Islamic State: Experience or Religious Doctrine?

Based on the above story, we can safely conclude that in terms of political leadership succession, the early Islamic community did not have a single established system. Furthermore, the mechanics existing at that time were not simply derived from Godly sources, rather they were created from trials and errors, the experiences of the caliphs and the moslem community as a whole. This is how the concept of Islamic state evolves within more than 1,400 years, experiences rule.

Under Abu Bakar's leadership, the Islamic community was still very small, and Abu Bakar spent most of his time fighting insurgents, mostly lead by fake prophets who tried to gain control over the moslem community. Thus, you won't find complex state organs under his era as his government mostly resembled tribal leadership. The only thing that may be considered as an evidence of modern state is the existence of baitul-mal, or the state's treasury, though at that time it mostly dealt with war's booty. Nevertheless, it is still a unique concept, as the war's booty is considered as people's assets and managed by the "state" through the baitul-mal It was actually under Umar bin Khatab leadership when Islamic community started to grow into a more formal state. During Umar's period, the Islamic community expanded their power aggressively and they succeeded in controlling many new areas. As more and more areas fell under the control of the moslem community, Umar realized that he was no longer able to directly supervise those areas. As a direct consequence, there is a necessity to appoint representatives of the caliph to lead and supervise those new areas, and suddenly, we have governors position.

Soon enough, official judges position were also available as the new community need professional lawyers to settle their disputes and uphold the law. In short, Umar fully understood his role as a caliph, administering the government, managing the needs of the people, and establishing a good foundation for a powerful state. He also believed that the caliph position is a political and administrative position. In other words, there's nothing holy about it.

Sadly, as the caliphate turned into a kingdom, the nature of the caliph's position was also changed. In order to secure the caliphs' power, new doctrines were formulated, they were seen as the representatives of God, their authorities over the people were granted by God. Some prominent scholars rejected this notion, and claimed that this is not the ideal form of Islamic leadership. I share the same view, but then again, it is a logic decision from the caliphs. When you are no longer elected by the people, you absolutely need a good doctrine to support your power, and what would be better than using God's name? These caliphs were not stupid, some of them were also good lawyers and soon they established caliphate's official scholars with the task to formalize the doctrine, changing the status of the caliphate from a mere administrative body of government into a holy state. It should be noted that in those eras, many scholars did not want to cooperate with the caliphs. Those who were willing to cooperate with the caliphate will not be respected as they will be considered as people who sold their soul to the devil.

The Illusion and Its Grave Consequences

For the sake of fairness, I won't say that the concept of Islamic kingdom is entirely bad, in fact the caliphate had their good moments in the history of mankind. But the damage has been done, this whole business creates an illusion to the Moslem community that the Islamic state, the caliphate, is a product of God, part of the religion, instead of a product derived from political experiences. There are some grave consequences when the caliphate is deemed as a part of religious doctrine, and we can easily spot one, i.e. the fact that most people who wish to establish an Islamic state focus most of their time in defining the characteristics of the Islamic state instead of how the state can be useful for its people.

In Umar's era, he did not bother the formal structure of the state, what bothered him the most was his people's prosperity. Another major problem is that this illusion also creates a false hope to many people. From historical perspective, the existence of the Islamic state does not automatically solve all problems. The history is very clear on this subject and it would be a huge lie if Abu Bakar, Umar, Ustman and Ali did not face critical and complex problems during their respective leadership. In some cases, they were successful, in other cases, they faced failures. However, some people buy the lies and completely believe that the establishment of the caliphate will solve all problems. I can only hope that this people could face the cruel reality someday.

Conclusion

We have reached an understanding that the concept of Islamic state is mostly derived from experience not religious doctrine. As a consequence, there is no use for discussing the formal structure of the Islamic state. Don't waste our time preaching the greatness of the Islamic state and the promise that it will bring, instead, we should really focus on how we can manage the state to provide better service to the people, and I am certain that this is relevant for the current Indonesia. Hope it's useful :) Happy Independence Day my beloved Indonesia!

Kind regards,

The Capitalist Lawyer

I am always happy to find new enlightening ideas, and I found them recently in a book titled "The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives." This book made by Michael Heller, a Law Professor from Columbia Law School, introduces the concept of the tragedy of the anticommons, i.e. a condition where due to over fragmented ownership of a resource (i.e. ownership of a single resource is distributed within too many owners), such resource is highly underused to the extent that it cannot provide any benefits to its owners nor the society. It is the opposite of the tragedy of the commons ("Common Tragedy") where a resource is overused to near extinction because no one have ownership over such resource and therefore no one cares about the sustainability of such resource.

In Part 1 of this Article, we will discuss the basic concepts of the Common Tragedy and the Anticommon Tragedy. Later in Part 2, we will discuss further issues related to Anticommon Tragedy and the proposed solution to solve such issues.

A. The Common Tragedy: What and Why?

First thing first, the concept of Common Tragedy is made on a solid logical foundation. Imagine if the human race never acknowledges the concept of ownership and therefore each and every man can use any resources that are visible, accessible, and usable to him. What will happen? Logically, everyone will try to exhaust such resources as soon as possible for fear of being preceded by others. There will be no incentive to conserve the resources in this case, simply because each person doesn't know whether other people will do the same. Why bother conserving if there is no mechanism to prevent other people to take the parts that are being conserved by you? As simple as that.

A simple example to this Common Tragedy is the crisis in tuna's supply. The fact that there is no clear licensing for fishing the tunas in the open seas has caused the tunas to be over-fished by the fishermen. As there is no one to supervise such fishing activities, those fishermen simply exhausted the tunas to near extinction level. Can we stop this crisis by simply stop eating tunas? Am not sure if that will be an effective solution. So what's the proper solution for this?

B. Solution for The Common Tragedy: Private Ownership

Yes, the best solution for the Common Tragedy is actually private ownership. Forget the utopian world of Karl Marx! If that utopian world could ever exist in this world, our overall life would be worse than ever.

In general, private ownership provides the best incentive to people to protect valuable resources. After all, each person will do his best to protect his own interest and will not let other people take his rights easily. Let me give you a simple example. Suppose you purchase a land in a city. Soon after you secure all necessary legal documents, you will most probably put fences and maybe even guards to protect the land from illegal trespassers. You will not let unknown people to try using the land for their own benefit. In short, you think for the best interest of yourself, and by doing so you also protect the economic value of such land.

In this case, what would be the role of the state? The state may act as a guardian, a night watcher who will ensure that each man will play in accordance with the rule of the game.

C. Understanding The Anticommon Tragedy

However, while private ownership may be the best solution for preserving resources, it doesn't mean that this solution is perfect. The problem comes when there is too much ownership over a single resource. As I said before, each owner will act to his best interest and will try to maximize his benefit from his part of ownership in such resource. What would happen then? Each owner will most likely block the other owners from using the resource to ensure that they can get the maximum benefit. Sure, they can talk among themselves and reach a mutual understanding on the management of the resource, but what if the number of the owners is very big, so big that the transaction costs of doing good faith negotiations would be too expensive? Here comes the Anticommon Tragedy.

One of the most interesting examples of Anticommon Tragedy is the problem faced by the pharmaceutical industry. I am very sad to know that the cures of some major sicknesses, such as AIDS and cancer, have not been invented yet not because our inventors are too stupid to create them, but because of a very serious dispute on intellectual property rights. There are so many patents for each individual element that is needed to make a cure and each patent holder blocks the cure inventor to use such patent without paying a very high price. As a result, the company feels that pursuing such cure becomes not viable and stop its effort to make one. In this case, the society as a whole becomes the main victim.

Or let us see another simple example regarding a plot of land. Suppose that you enter into an agreement to purchase a land from an old landlord. However, just when you're about to close the transaction, he died suddenly. Apparently the landlord was a millionaire and had lots and lots of heirs, and you know what, that plot of land quickly falls into a dispute between heirs. In this case, you'll be trapped spending a lot of time to negotiate with each heir, finding the right price to satisfy each of them. You might end up getting nothing from this condition as you will realize it is almost impossible to satisfy all of them. In Ronald Coase's theory, the transaction costs are just too huge to follow up the transaction.

Gridlock can also occur in regulatory agencies, that is when there are too many regulators to deal with. One major example would be our beloved country Indonesia. When an investor try to invest in Indonesia, it must deal with many authorities, each having their own jurisdiction and don't even think to see any slight evidence of good coordination between them . This situation create a high cost economy to investors. Not only that they are being confused with the number of authorities, each authority may block the license necessary to conduct the investment. Imagine if you have secured all necessary licenses, all but one, and then you realize that your whole investment fails due to that one particular problem. This type of gridlock is truly a dangerous one.

Looking at the examples above, I am sure that you will consider the Anticommon Tragedy as a very interesting issue. Now, what can we do to solve this issue? Stay tune in the second part of this post :).

"If you owe your bank a hundred pounds, you have a problem. But if you owe a million it has."

(John Maynard Keynes - British Economist and founder of the Keynesian School)

Introduction

Keynes' brilliant statement above can accurately describes one of the most crucial problems of international financing activities, i.e., overconfidence in giving loans to companies from emerging markets, which is highly risked, tends to create problems rather than improvements. Problems not only to the financial institutions involving in such financing activities but also to the debtors, as in the end both of them are facing losses, not profits.

This overconfidence, combined with a lack of supervision from the Indonesian authorities can be considered as one of the main factors of the financial crisis in 1997. In that fateful tragedy, an already huge amount of foreign debts which were borrowed recklessly by Indonesian private companies suddenly turned into an endless pool of debt where Indonesian companies were drowning frantically due to the crisis in Rupiah's value.

Some people blame the speculators for creating that disaster, but those speculators are only a part of many factors that formed the crisis back in 1997. Another crucial factor which is also very important is the management of Indonesian private foreign borrowings. Without proper supervision and good risk management, foreign borrowings might be troublesome to the monetary policy of Indonesia and also the sustainability of business activities. Considering the fact that the amount of Indonesian global debt offering transactions are increasing significantly, it might be worthwhile to see the relevant issues that we may face and the policy that should be taken to prevent or solve them.

Why Choose Foreign Debts? 

There are many reasons for raising foreign debts, but I know one obvious reason and that is the lower interest rate. As you may be aware, there is a big discrepancy of interest rate between the US Fed and Bank Indonesia and therefore, to certain extent, obtaining foreign borrowings is more commercially acceptable to Indonesian companies since they can get a lower interest rate.

Of course, if there is no financial crisis, this formula might work. Unfortunately, when the Rupiah's value fell into the depth of hell in 1997, the disaster is inevitable. By having too many debts in foreign currencies and without having any hedging mechanism, the majority of Indonesian companies fall into bankruptcy when they realize that their debts have increased tremendously in correlation with the fall of Rupiah's rate.

Hiding Behind the Scene: Old Regulations on Foreign Borrowings

It is ironic that many Indonesian private companies were crushed in a crisis caused by unmanageable foreign borrowings while the Indonesian Government has already been dealing with foreign borrowings for a long time. It was in 1972, when the President of Indonesia issued Presidential Decree No. 59/1972 on Foreign Commercial Borrowings ("PD 59"), an archaic regulation which has been almost totally forgotten by everyone though it is still a full binding regulation.

Under PD 59, certain restrictions were imposed upon Indonesian companies, such as:

• in case the borrowings involve the Government's guarantee, state owned companies are restricted to receive foreign borrowings without prior approval from the Minister of Finance (later on, the minister approval will be replaced by the approval of the Coordinating Minister of Economy, as the head of the Foreign Commercial Borrowing Team ("PKLN Team"), and the state owned companies are required to obtain prior approval from the PKLN Team before receiving any foreign debts, regardless of whether the Government acts as a guarantor or not to such foreign debts); and
• private companies must report their foreign borrowings in a periodical basis to the Ministry of Finance and Bank Indonesia.

What was the main reason for issuing this PD 59? The reason, I believe, is quite simple, i.e. to manage the currency risk of those debts by supervising those Indonesian companies. Most Indonesian companies receive their income in Rupiah, but when Indonesian companies receive debts in foreign currencies, they have an obligation to pay those debts in foreign currencies. Due to such discrepancy, there is always a currency risk, a time bomb which eventually will explode, destroying everything.

To cut it short, while the nominal amount of the foreign debts will not change, the real amount may change in correlation with the progress of Rupiah's value. If the Rupiah's rate increase, the companies are lucky, but if not, they will face some serious problems. Imagine if a company has too many debts in foreign denomination and at the same time Rupiah's rate falls drastically. With an increase in the actual amount of the debts and without significant additional income, could the company still afford to pay its debts? I don't think so. And if there are too many companies having the same problem, what would be the result? A financial crisis!

Therefore, in my opinion, foreign borrowings must be supervised, so that the risk can be maintained. Of course there is a question on how such supervision can actually prevent the crisis? Further, how should the Government balances the policy to maintain the flexibility for those private companies in raising foreign debts.

Current Condition: Not Much Improvement

Interestingly, there isn't much improvement since the fateful 1997 crisis. As I've seen during my practice, Indonesian companies are still happy to pursue foreign debts, whether through bilateral or syndicated loan agreements arranged by foreign commercial banks or issuing notes to international investors arranged by investment bankers. Submitting reports to the PKLN Team, the Ministry of Finance and Bank Indonesia for Indonesian private companies or obtaining PKLN approval for state owned companies before getting their foreign debts have become administrative obligations which have no value other than to secure a clean legal opinion from lawyers.

This is indeed a sad news, yet inevitable. Due to the lack of implementing policy, the PKLN Team has forgotten their own task, and I have a solid evidence for this. In one transaction, we were asked to give a presentation to members of the PKLN team on the roles and authorities of the PKLN Team relating to PKLN approval. I must say that this is quite hilarious.

That's why, it does make sense when I heard a rumor that the Government intends to revoke the 1972 and 1991 regulations. Why preserving regulations which don't have any efficacy, regulations which only create administrative problems for private companies and state owned companies when they are trying to raise foreign debts?

True, we cannot maintain ineffective regulations, but in the case of foreign debts, I believe that the Government is missing the main point. Such administrative measures were created to protect the interest of those Indonesian companies! Rather than revoking those regulations, why not improving their implementation? But I guess, the Government may have their own thoughts, and I assume that this is related to the separation of tasks between the Government, as the guardian of Indonesian fiscal policy, and Bank Indonesia, as the guardian of Indonesian monetary policy.

Latest Regulations on Foreign Borrowings

After going through an enduring period, Bank Indonesia issued Bank Indonesia Regulation No. 10/7/PBI/2008 on Foreign Borrowings of Indonesian Non-Bank Companies on 19 February 2008 which was further followed up by an implementing regulation in the form of a circular letter on 22 December 2008. Basically, this regulation requires Indonesian non-bank companies to submit periodical reports (annually or semi annually) concerning their financial viability (this include the submission of a report on their financial ratio and their financial statement) and risk management analysis before they obtain foreign borrowings in any form whatsoever. The regulation also requires these Indonesian non-bank companies to obtain ratings from local or international rating agencies for each debt that they would obtain. Those who are interested to see the form of the report can see it here.

The purpose of this regulation is to ensure that Indonesian companies have sufficient consideration and a proper risk analysis in determining whether they should pursue loans from foreign parties, whether they are banks, other financial institutions, or bonds investors. Bank Indonesia states in this regulation that foreign borrowing is one of the major factors which may affect the Indonesian monetary stability and the sustainability of the Indonesian economic development, and therefore proper supervision is needed.

In my opinion, this regulation is quite balanced. I don't think that it can significantly affect the flexibility of Indonesian private companies in raising foreign debts. On the other hand, the regulation might provide various useful guidelines for the companies in conducting proper analysis before they get those foreign debts. In other words, this regulation is a further advancement to the old 1972 and 1991 regulations which only required submission of simple reports.

The regulation also imposes sanctions in the form of warning letters and announcements to the public (domestic or international). This is a good move from Bank Indonesia and the sanction should be more effective than any other penal sanctions, since reputation is very valuable in the market, and no companies dare to risk their good reputation for unclear benefits. It should be noted though that the sanctions will be effective on 1 January 2010.

I have high hopes on the further implementation of this regulation. Getting many global debt offering and other international financing deals are good for lawyer's business. However, it is also important to ensure that we are not advancing these companies toward doom because of reckless debt policy. Bank Indonesia should be strict when it deals with this reporting obligation to ensure the compliance of the Indonesian companies. After all, these regulations are made to protect their interest in the long term and the regulation can be a good nudge for them.

I have discussed Law No. 24/2009 on National Flag, Language, Emblem and Anthem ("Law 24/2009”) in my post dated 27 August 2009. However, I feel that my analysis on the issues related to this Law 24/2009 is not complete, I am not satisfied with the legal analysis in my previous post and in practice, the impact of this Law is greater than I've ever thought to be. Thus, I believe that I must revisit the issues on Law 24/2009 and provide a deeper analysis in this blog.

Our main issue revolves around Article 31 of Law 24/2009. The first paragraph of this Article requires the use of Indonesian language in agreements involving state institutions, Indonesian government authorities, Indonesian private institutions or Indonesian individuals. The elucidation of Article 31 paragraph 1 states that an agreement in this context includes international agreements made within the framework of public international law.

Article 31 paragraph 2 of Law 24/2009 further states that if the agreements involve foreign parties, the national language of those foreign parties and/or the English language can also be used. Furthermore, the elucidation of Article 31 paragraph 2 states that if agreements are executed in multiple languages, i.e.: Indonesian language, the national language of the foreign party and/or English language, each version is equally original.

Although the above provisions look simple, they have triggered significant legal problems, i.e.:

• whether Indonesian companies are obliged to use Indonesian language in their commercial contracts since Article 31 paragraph 1 and its elucidation are not particularly clear on whether (i) the term “Indonesian private institutions” includes Indonesian companies or Indonesian branches of foreign companies; and (ii) the term “agreements” includes private commercial contracts;
• suppose they are obliged to use Indonesian languages, what would be the legal impact for any failure to do so? Is this is a mandatory obligation or merely an administrative requirement?
• with respect to dual languages contracts, whether “equally original” means that each contract must be executed as original (not merely translation) and if yes, whether the parties to such contract can choose non-Indonesian language as the governing language.

In practice, the impacts are disastrous, especially in relation to commercial contracts made between Indonesian and foreign parties. Most foreign parties fear that the failure of using Indonesian language in their contracts might cause the contracts to be annulled by operation of law due to breach of mandatory legal obligation. As a result, they act conservatively and request that the contracts must be executed in dual languages. Not only that this choice of action significantly delays the transactions completion and increases the parties’ costs, it also imposes unnecessary risks and liabilities, particularly because certain complicated contracts such as Indenture, Trust Deed and EPC Contracts are too technical to be perfectly translated into Indonesian language (which is a very young language compared to English). As a result of this and without any definitive meaning on the concept of “equally original,” parties are running the risk of executing a contract with misleading or incorrect terms and conditions.

While the fear is understandable, in my opinion, acting conservatively does not solve the problems and there are better ways to solve them rather than executing all contracts in dual languages format. First, we should refer to Article 40 of Law 24/2009 which stipulates that the use of Indonesian language will be further stipulated in Presidential Regulations. I appreciate the fact that the provisions of Law 24/2009 are still valid even without those Presidential Regulations. However, it also indicates that the provisions of this Law is not yet complete, which in fact is true. As a matter of Indonesian legal principle, when the text of the law is not clear, parties to a contract should not interpret the law for the detriment of any of the parties. If a party tries to annul a contract due to failure of using Indonesian language where each party to that contract is aware that having such Indonesian version would most probably cause adverse effect, it shows that such party has bad faiths and in my opinion the court should not grant the claim. After all, why forcing the parties to use Indonesian language if it does not give any clear benefit to them?

Second, Law 24/2009 does not provide for any sanction for failure to comply with the above requirements, and it is arguable under the general Indonesian legal principle that when a law provision does not have any sanction (or the sanctions are merely administrative), the failure of performing such provision cannot affect the validity of a legal act, i.e. the contract. This has been made clear in a famous landmark case where the Supreme Court decided that the failure of submitting a report on foreign loan (which is an administrative requirement under Bank Indonesia regulations) cannot be used as a valid reason to annul a credit agreement made between an Indonesian debtor and foreign creditors. While I understand that there is a previous case on the similar matter where the credit agreement was annulled, the latter precedent should prevail since it is in accordance with the correct interpretation of law and is closer to fairness, i.e. it is completely ridiculous and unfair to the creditors to invalidate a credit agreement due to the failure of the debtor to submit some administrative reports.

Therefore, I would suggest that in case a contract involves Indonesian and foreign parties, the parties should not execute a dual languages contract without first performing a complete analysis on the advantages and risks of having such format. Suppose they conclude that having a dual languages contract is not a viable option, I would suggest them to insert a clause stating that they have agreed to execute the contract in non-Indonesian language and that they will execute an Indonesian language version of the contract when the implementing regulations clearly oblige them to do so. This mechanic would be useful to prevent any party having bad faiths from trying to annul the contract.

On the "equally original" phrase, my suggestion is that the Parties involved must also insert a clause concerning governing language. It is indeed unclear on whether the equally original means that each language should be deemed as applicable. However, when in doubt, the Parties should not use an interpretation that harms them. In addition, why don't we refer to the freedom of contract principle? The Parties should be able to agree on the governing language of the contract, and therefore eliminating any risks to have misleading or incorrect terms. However, the main question would be: if the Parties execute the Indonesian language contract for the sake of complying with Law 24/2009 and the governing language of such Contract is non-Indonesian, what is the purpose of having an Indonesian version in the first place? Is not this a waste of time and money? The Government should answer this big question.

In the end, we can conclude that the existence of Law 24/2009 brings more problems than benefits in practice, particularly in relation to the use of Indonesian language. While, we can argue and use several solutions to solve the issues brought by Law 24/2009, it should be noted that there are no bullet proof mechanisms here. The courts could always have a different interpretation. So, let us hope that the Government can give us a better solution through the implementing regulations and the courts can decide based on the correct and fair interpretation of the law while we are waiting for the implementing regulations.

At last, the long awaited draft amendment to the VAT law has been passed by the Indonesian legislative board (the "New VAT Law"). You can see the soft copy here. The law will be effective as of 1 April 2010. The most important thing here is the fact that the New VAT Law recognizes the existence of Islamic finance and exempts VAT for transactions that fall under the term of Islamic finance. Article 1A Paragraph (1) h of the New VAT Law states that with respect to delivery of taxable goods by taxable entrepreneur in the context of Islamic financing activities, such delivery shall be only considered between the taxable entrepreneur and the party needing such taxable goods. While the elucidation of this Article does not provide specific explanation, it gives an example of a murabahah transaction for a vehicle financing, where an Islamic bank buys a car from a taxable entrepreneur based on an order from the Islamic bank customer. In this example, the New VAT Law acknowledges that under such Islamic financing structure, the Islamic bank would need to purchase the vehicle first and then resell it to its customer, however the New VAT Law further confirms that the delivery of such car is considered to be directly done from the taxable entrepreneur to the Shari'a bank customer. In other words, we can conclude that the New VAT Law acknowledges the role of the Islamic financial institutions as financial intermediaries. In addition to the above, Article 4A Paragraph (3) d of the New VAT Law states that financial services are exempted from VAT. The elucidation of such Article further states that the definition of financial services include Shari'a based financing, whereas the financial services may be in the form of: (a) leasing, (b) factoring, (c) credit cards, and (d) consumer financing. Although the above wordings are not clear enough to capture all kind of Islamic financing structure, I am still very happy with this new development as I believe that the New VAT Law might be the right trigger for bringing the Indonesian Islamic finance to a new level. As you may be aware, before the enactment of this law, there is a huge confusion within Islamic finance players on whether their transactions are actually exempted from VAT or not. To add the confusion, in most of the time, the tax authorities were silent on the tax treatment. In short, it was like sitting on a deadly time bomb. In my opinion, there should not be any confusion in the first place, since from the accounting perspective, these Islamic financing transactions are recorded as ordinary financing transactions in the balance sheets of companies that receive such Islamic financing (substance over form) . In other words, there would be no record of sale and purchase or sale and lease back transactions in the financial statements since those structures are merely used to satisfy the Shari'a aspect and do not reflect actual transactions. However, a risk is a risk and without having any tax advisor who is brave enough to issue a clean tax opinion, most Islamic financial institutions were not eager to develop the business in Indonesia. Thus, there are no significant development of Indonesian Islamic finance until today. Hopefully, this should be no longer the case. In addition to the above, further implementing regulations are still needed to resolve the remaining issues as provided below:

• Will there be any criteria to determine the transactions that fall under Islamic finance transactions? I guess the Government will need to stipulate such criteria to avoid any moral hazard from business players who are trying to avoid paying VAT under the disguise of Islamic financing transactions.
• It is unclear on how Ijarah transactions (lease structure) will be treated under the New VAT Law, since there is no transfer of beneficial ownership in an Ijarah transaction. Should the transaction be considered as an ordinary lease transaction? Surely not, but I would like to know how this will be solved from tax perspective.
• While Ijarah Muntahia bit Tamlik financing structure (sale and lease back) should be accommodated under Article 4A Paragraph (3) d of the New VAT Law, it seems to me that this article only applies to leasing companies. What about IMBT financing provided by other kind of Islamic financial institutions, such as Islamic banks? Is there any requirement for securing a leasing company license before the exemption works?
• What about Sukuk? From the original wordings, it seems that the New VAT Law only covers plain vanilla Islamic financing transactions conducted by Islamic banks.

I guess that would be the preliminary issues related to the New VAT Law. I will give more updates on this subject after the Government has issued further implementing regulations.